Higher Tariff On US LNG Would Weigh On China

If imposed, higher tariffs on US LNG will drive-up the cost of China's ongoing state-led gasification efforts, particularly during the winter months when China's domestic gas demand, and with it the need for US LNG, peaks.

In contrast, the impact on the US LNG industry will be fairly limited, as most of the US' current LNG exports are already secured on long-term contracts with buyers.

Qatar, Australia and Russia will be the main beneficiaries from any supply gap created by lower off-take of US LNG due to imposition of higher retaliatory tariffs.

Trade tensions between the world's two biggest economies continue to escalate, with China proposing a 25.0% import tariff on a further USD60.0bn worth of US goods including LNG, in a tit-for-tat response to US President Donald Trump's latest threat to impose duties on an additional USD200.0bn in Chinese imports.

If imposed, a higher tariff on US LNG will drive-up the cost of China's ongoing state-led gasification efforts, particularly during the winter months when China's domestic gas demand, and with it the need for US LNG, peaks. US LNG comprises a relatively small component of China's overall gas mix. However, a spike in household and industrial heating demand during winter significantly drives up the need for spot cargoes such as those from the US to supplement contracted volumes. China imported 1.6bcm of US LNG over November 2017-January 2018, more than the total amount imported over the first 10 months of 2017, with flexible US cargoes with no destination restrictions proving decisive in meeting surging demand across China's north and northeastern provinces. However, higher tariffs on US LNG would erode its competitiveness versus other oil-indexed LNG and pipeline supplies, subjecting Chinese buyers to greater supply risks and global oil price fluctuations.

Tariffs Could Price-Out US LNG

China - Total LNG Imports (LHS) & LNG Imports From US (RHS), bcm

Source: China General Customs Administration, Fitch Solutions

In contrast, the impact on the US LNG industry will be fairly limited, as most of the US' current LNG exports are already secured on long-term contracts with buyers. Instead, the most negatively impacted will be major LNG portfolio players such as Shell, Total and Trafigura, which off-take cargoes from US-based projects such as Sabine Pass and Cove Point LNG, before selling them onto markets where demand and price are the strongest. A 25.0% import tariff, amid a backdrop of strong government rhetoric against US energy imports, is likely to see US LNG priced out of the lucrative Chinese gas market. However, any loss in Chinese demand for spot cargoes will be partly offset by strong LNG demand growth forecast across Europe, South and Southeast Asia and Latin America.

Qatar, Australia and Russia will be the main beneficiaries from any supply gap created by lower off-take of US LNG due to imposition of higher retaliatory tariffs. Qatar's net LNG exports is projected to increase to 137.0bcm from 107.0bcm over the next five years due to ongoing expansion, giving it plenty of spare capacity to meet rising demand in China, while Woodside Petroleum and Chevron are racing one another to spearhead the next wave of LNG export growth in Australia based off gas from the Scarborough, Equus and Browse fields offshore the country's west coast. The commissioning of the Power of Siberia pipeline at end-2019 could see the inflow of up to 38.0bcm of Russian gas per annum from gas fields in East Siberia, and the country stands geographically well-situated and boasts ample spare capacity to meet a greater portion of China's future gas demand.